Kevin S. Moser

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE: ) Bankruptcy No. 17-23960-JAD

)

KEVIN S. MOSER, ) Chapter 7

)

Debtor. ) Related to Doc. No. 163

X

)

INNOVATIVE BUILDING )

SOLUTIONS, LLC, )

)

Movant, )

)

-vs.- )

)

KEVIN MOSER, Debtor, and )

ERIC BONONI, Esq., Chapter 7 )

Trustee, )

)

Respondents. )

X

MEMORANDUM OPINION

The matter before the Court is the Motion to Dismiss Bankruptcy Pursuant

to Section 707 of the Bankruptcy Code (the “Motion to Dismiss,” ECF No. 163)

filed by creditor, Innovative Building Solutions, LLC (“IBS”). By its Motion, IBS

seeks to dismiss the Debtor’s bankruptcy case on account of the Debtor’s alleged

bad faith conduct.

I.

The Motion to Dismiss is a core proceeding over which this Court has the

requisite subject matter jurisdiction to enter final judgment pursuant to 28

U.S.C. §§ 157(b)(1) and 157(b)(2)(A). For the reasons set forth below, the Court

shall enter an order denying the Motion to Dismiss.

II.

By way of background, the Debtor, Kevin S. Moser, commenced his

bankruptcy case by filing a voluntary petition under chapter 13 of the United

States Bankruptcy Code (11 U.S.C. § 101 et seq.) on October 3, 2017.

IBS is a creditor of the Debtor. The relationship between the Debtor and

IBS is that the Debtor, a commercial contractor, performed work for IBS on

approximately twenty-five projects beginning in 2009. See Joint Stipulation of

Facts and Evidentiary Appendix (the “Joint Stipulation”) ¶¶ 1-2, ECF No. 169.

However, the relationship soured. On July 28, 2017, IBS brought suit against

the Debtor and a co-defendant in state court alleging negligence, breach of

contract, and unjust enrichment claims. See Joint Stipulation ¶¶ 3-4.

In his initial petition, the Debtor scheduled $438,000 in assets and

$59,000 in debts. See Joint Stipulation ¶ 15. Included in the total assets was

an entry for “Business Equipment” valued at $200,000 and an entry for

residential real property valued at $180,000. See Schedule A/B: Property, ECF

No. 13 at 3, ¶ 1.1, and 8, ¶ 40. The Debtor also listed IBS in his Schedule E/F:

Creditors Who Have Unsecured Claims as having a disputed claim valued at

$0.00 and the entry was designated for “Notice Only.” See ECF No. 13 at 14, ¶

4.2.

Along with his completed petition, the Debtor filed a chapter 13 plan

proposing to pay one hundred percent of the Debtor’s uncontested, unsecured

creditors (then totaling $16,052.23). See Chapter 13 Plan Dated November 5,

2017 4, ¶ 16, ECF No. 14. IBS objected to the plan. See Innovative Building

Solutions, LLC’s Objection to Confirmation of Debtor’s Chapter 13 Plan Dated

November 5, 2017, ECF No. 19. IBS later filed a proof of claim in the amount of

$324,248.00 on February 13, 2018. See Proof of Claim 4-1. The Debtor objected

to IBS’s claim, but the objection was ultimately overruled by the Court.!

On January 8, 2020, the Debtor’s case was converted to one under chapter

7 because of the Debtor’s inability to confirm a plan which satisfied the

liquidation alternative requirement imposed by 11 U.S.C. § 1325(a)(4).2 See

Transcript of hearing held January 8, 2020 (the “January 8, 2020 Tr.”), ECF No.

181. IBS’s Counsel, present at the January 8, 2020 hearing, agreed to the

conversion. See January 8, 2020 Tr. 3.

Thereafter an order was entered converting the case to chapter 7 and

setting deadlines to object to the good faith of the conversion. See Order dated

January 8, 2020 (the “Order Converting Case”), ECF No. 110. No objection was

timely filed by any party, including IBS.

Following conversion of the Debtor’s case to chapter 7, on February 13,

2020, the Debtor amended several schedules, including Schedule A/B to reflect

a downward adjustment in the value of both the Debtor’s residence to $75,000

and his business equipment to less than $20,000. See Joint Stipulation ¢ 34;

! The Debtor’s objection to IBS’s claim was overruled on account of its untimeliness and

the Debtor’s failure to sufficiently rebut the prima facie validity of IBS’s Proof of Claim.

See Transcript of hearing held December 12, 2018, ECF No. 178.

2 Section 1325 of Title 11 requires for chapter 13 plan confirmation that, “the value, as

of the effective date of the plan, of property to be distributed under the plan on account

of each allowed unsecured claim is not less than the amount that would be paid on such

claim if the estate of the debtor were liquidated under chapter 7 of [Title 11] on such

date[.]” See 11 U.S.C. § 1325(a)(4).

see also Amended Schedule A/B: Property, ECF No. 122 at 3, 4 1.1, and 8, 7 40.

The non-exempt property of the Debtor was thereafter liquidated by the Chapter

7 Trustee. The purchaser of the assets was IBS for a total of $15,500.00. See

Order dated June 2, 2020, ECF No. 148.

Following the sale, IBS was granted leave, without objection, to examine

the Debtor pursuant to Bankruptcy Rule 2004 on July 28, 2020. IBS then filed

the instant Motion to Dismiss on September 15, 2020, citing, in part, to the

Debtor’s testimony at the Rule 2004 exam.

Ill.

This case was originally filed under chapter 13 of the Bankruptcy Code.

Although by its Motion to Dismiss, IBS challenges the good faith of the Debtor’s

bankruptcy case since inception, the law provides that post-conversion the issue

of whether the Motion to Dismiss should be granted is governed by 11 U.S.C. §

707(a).2 See Blumenberg v. Yihye (In re Blumenberg), 263 B.R. 704, 712 (Bankr.

E.D.N.Y. 2001)(dismissal of case converted from chapter 11 to chapter 7 is

determined pursuant to 11 U.S.C. § 707).

Section 707(a) of Title 11 provides as follows:

(a) The court may dismiss a case under this chapter only after notice

and a hearing and only for cause, including--

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees or charges required under chapter 123

of title 28; and

3 Although the Motion to Dismiss identified 11 U.S.C. § 707 generally as the statutory

authority for relief, IBS later narrowed its basis for relief to § 707(a). See Motion to

Dismiss Jf 3, 41-42. To the extent IBS seeks relief under other subsections of 11 U.S.C.

§ 707, such requests are insufficiently set forth to merit consideration by the Court.

(3) failure of the debtor in a voluntary case to file, within fifteen days

or such additional time as the court may allow after the filing of the

petition commencing such case, the information required by

paragraph (1) of section 521(a), but only on a motion by the United

States trustee.

See 11 U.S.C. § 707(a).

Before wading into the merits of IBS’s Motion to Dismiss pursuant to 11

U.S.C. § 707(a), the Court must first address the timeliness of the Motion.

The Motion to Dismiss is Time Barred

Unlike a motion to dismiss brought pursuant to 11 U.S.C. §§ 707(b) or

707(c), the Bankruptcy Code and Rules provide no express, universal deadline

for commencing a motion under 11 U.S.C. § 707(a). See In re Champion, 600

B.R. 459, 464 (Bankr. S.D. Ga. 2019).4- However, this absence does not mean

that a movant’s time to seek dismissal is unlimited. See e.g. In re Dini, 566 B.R.

220 (Bankr. N.D. Ill. 2017)(despite lack of statutory deadline to assert 11 U.S.C.

§ 707(a) claim, movant barred from seeking dismissal pursuant to 11 U.S.C. §

707(a) by doctrine of laches due to unreasonable delay in asserting claim and

prejudice to debtor); In re Champion, 600 B.R. at 468-471 (United States

4 The issue of whether a motion to dismiss is effective or timely if filed after a debtor

becomes entitled to a discharge but before the discharge order is actually entered is an

area of law not widely written about. See Champion v. Morris Bank, CV 319-029, 2019

WL 3729558, at *3 (S.D. Ga. Aug. 7, 2019)(“The Court is unable to find any case that

specifically addresses whether a § 707(a) motion to dismiss filed after the objection

deadline but before discharge is entered prevents a bankruptcy court from entering

discharge.”). This Court notes that a motion to dismiss may become moot after a debtor’s

discharge is entered, unless the movant can successfully establish grounds for

revocation under 11 U.S.C. § 727(d). Thus, a movant seeking to dismiss should file its

motion before a debtor becomes entitled to entry of a discharge in accordance with Rule

4004(c).

Trustee’s time to seek dismissal under 11 U.S.C. § 707 was limited by the terms

of a consent order).

Sub judice, this Court expressly limited the time to challenge the good faith

conversion of the Debtor’s bankruptcy case from chapter 13 to chapter 7.

Specifically, included in the conversion order dated January 8, 2020, was the

following directive:

Any party-in-interest that challenges the good faith of the conversion

shall, on or before January 28, 2020, file a motion setting forth the

basis of the challenge and specifically identifying the relief requested

in the event conversion is found not to have been made in good faith.

Order Converting Case at ¶ 1.

No such motion was made by IBS, nor any other party by the deadline.

Although the mandate does not expressly reference 11 U.S.C. § 707(a), the

Court’s reference to “good faith” of the conversion was sufficient to put IBS on

notice of a need to bring any § 707(a) challenge to the conversion—as opposed

to dismissal outright—by the deadline. Thus, the Motion to Dismiss is untimely.

The Court acknowledges that in the Motion to Dismiss and at the

November 3, 2020 hearing, IBS highlighted that some of the bases for its “bad

faith” claim—i.e. the amended schedules and Debtor’s motivation for filing—were

not firmly discovered until after the January 28, 2020 deadline had passed. The

Court is not persuaded by this argument.

While it is true that the Debtor’s amended schedules were not filed of

record until February 13, 2020, IBS was previously made aware or should have

been aware that the assets were overvalued in the Debtor’s original schedules.

Indeed, at the hearing held November 13, 2019, Debtor’s Counsel represented to

the Court that the values assigned to the Debtor’s assets in his Schedule A/B

were likely overstated. Further, Debtor’s Counsel stated that if the case were

converted to a chapter 7, there would “probably [be] a minimal liquidation

distribution.” See Transcript of hearing held November 13, 2019 (the “November

13, 2019 Tr.”) 2, ECF No 180. In this regard, Debtor’s Counsel indicated that

Debtor’s real property, originally scheduled at $180,000 was appraised at

$75,000. See November 13, 2019 Tr. 5-6. Additionally, it was recognized that the

business assets originally scheduled at $200,000, were now estimated as being

worth “maybe $30,000.” See November 13, 2019 Tr. 13. Counsel further

explained that the Debtor had utilized a replacement value to estimate worth

when he originally filed his schedules as opposed to a fair market value. Id.

Counsel for IBS was in attendance for the November 13, 2019 hearing, and was

fully advised as much.

The inaccuracy of the Debtor’s schedules was further communicated to

IBS through the Debtor’s delivery of the real property appraisal to IBS on

November 19, 2019, and by the Debtor’s written discovery responses produced

on December 12, 2019. See Joint Stipulation ¶¶ 30-31.

Moreover, IBS itself acknowledged in its Pre-Hearing Statement filed

January 8, 2020 that the Debtor believed the asset valuations to be inflated. See

ECF No. 107 at 3 (“Recently, representations made by Debtor’s counsel call into

question the accuracy of Debtor’s schedules. Specifically, during a prior hearing

in this matter held on November [13], 2019, Debtor’s counsel acknowledged that

asset valuations contained within the Debtor’s bankruptcy schedules were

inflated.”)

With respect to the Debtor’s filing being motivated by the IBS lawsuit, the

Debtor’s timing of the bankruptcy petition in relation to the state court

proceedings was always known, as well as the Debtor’s income at the outset of

this bankruptcy case and his limited debts.°

In contrast to IBS’s position, the Debtor argues that IBS should be

estopped from obtaining the benefits of the liquidation that occurred under the

auspices of chapter 7 and then seeking dismissal. This Court agrees. IBS not

only did not object to the Debtor’s conversion to chapter 7, but outright

supported it. In converting to chapter 7—as opposed to having his case

dismissed—the Debtor submitted his non-exempt business equipment for

liquidation for the benefit of his creditors, including IBS, potentially hampering

the Debtor’s ability to generate income going forward. Now that the Debtor’s non-

exempt assets have been liquidated, IBS seeks dismissal. IBS clearly wants for

itself all the benefits of being a creditor in a chapter 7 case without the burden

5 Moreover, the Court notes that the Conciliation Conference Minutes for the July 25,

2019 meeting of creditors indicate that IBS believed grounds existed to support a finding

of bad faith prior to the January 28, 2020 deadline to object to conversion. The minutes

read that “Innovative Building Solutions requests the case be converted in lieu of

dismissal on the basis that it believes case filed in bad faith, a substantial delay that is

prejudicial to creditors, and because of material equity that is believed to exist in

Debtor’s [real estate] & business personalty that can fund distribution to [unsecured

creditors].” See Conciliation Conference Minutes, attached as Exhibit E, p. 4 to the Motion

to Dismiss. IBS also alleged in its Pre-Hearing Statement filed on January 8, 2020 that

the Debtor had engaged in a pattern of bad faith conduct in pursuing his chapter 13

bankruptcy case. See ECF No. 107 at 3-6. The Pre-Hearing Statement was filed just prior

to the hearing held that day at which IBS agreed to the Debtor’s conversion to chapter

7. See January 8, 2020 Tr. 3.

of the Debtor’s discharge, while at the same time seeking to impose all the

burdens of a chapter 7 on the Debtor (i.e. asset liquidation) without the benefit

of discharge. This is not within the intent and spirit of the Bankruptcy Code. For

this reason, the Court finds the Motion to Dismiss untimely.

Even if the Motion to Dismiss were deemed to be timely, the Court would

nonetheless deny the Motion to Dismiss on its merits.

Section 707(a) of the Bankruptcy Code permits a court to dismiss a

chapter 7 case for “cause.” See 11 U.S.C. § 707(a). Although not expressly

provided for in the non-exhaustive list of what constitutes “cause” thereunder,

the Third Circuit Court of Appeals has observed that § 707(a) permits dismissal

for lack of good faith in filing a bankruptcy case. See Tamecki v. Frank (In re

Tamecki), 229 F.3d 205, 207 (3d Cir. 2000). Adding, that “[a]lthough the Code

does not define ‘good faith,’ courts in this circuit have uniformly held that ‘[a]t

the very least, good faith requires a showing of honest intention.’ ” See id.

(quoting In re Marks, 174 B.R. 37, 40 (E.D. Pa. 1994)).

Whether to dismiss a case for lack of good faith is within the sound

discretion of the bankruptcy court. See In re Tamecki, 229 F.3d at 207.

Nonetheless,

[d]ismissal based on lack of good faith . . . should be confined

carefully and is generally utilized only in those egregious cases that

entail concealed or misrepresented assets and/or sources of income,

lavish lifestyles, and intention to avoid a large single debt based

upon conduct akin to fraud, misconduct or gross negligence.

Id. at 207 (quoting Indus. Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124,

1129 (6th Cir. 1991)); see also Perlin v. Hitachi Capital Am. Corp. (In re Perlin),

497 F.3d 364, 373 & 375 (3d Cir. 2007)(citing Tamecki, and also finding that a

case was not filed in bad faith where there was no evidence that the debtors

schemed to conceal or misrepresent income, inflated expenses to hide income,

filed misleading statements or schedules as an effort to defraud creditors, unduly

interfered with the judicial process, or engaged in other misconduct); and In re

Marks, 174 B.R. at 40-41 (citing Zick, and also observing that most instances

of bad faith under § 707(a) involve “concealment, misrepresentation, or

unexplained transfers to place assets beyond the reach of creditors” and that in

the absence of those circumstances it is not an abuse of discretion to find a lack

of bad faith).

In evaluating good faith, the court “must decide whether the petitioner has

abused the provisions, purpose, or spirit of bankruptcy law.” In re Tamecki, 229

F.3d at 207. Once the good faith of the petitioner’s filing is placed in question,

the petitioner has the burden of showing it is a good faith filing. See In re Sky

Grp. Int’l, Inc., 108 B.R. 86, 90 (Bankr. W.D. Pa. 1989); see also In re Tamecki,

229 F.3d at 207.

Determinations of good faith are “ad hoc” assessments which take into

consideration all of the facts and circumstances surrounding a bankruptcy case

filing. See In re Perlin, 497 F.3d at 372 (citing NMSBPCSLDHB, L.P. v. Integrated

Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108,

118 (3d Cir. 2004)(the good faith analysis is a “fact intensive inquiry” in which

the court must examine “the totality of facts and circumstances” and determine

where a “petition falls along the spectrum ranging from the clearly acceptable to

the patently abusive”).

In assessing the totality of the circumstances, the court “may consider a

wide range of factors, including, ‘the nature of the debt . . .; the timing of the

petition; how the debt arose; the debtor’s motive in filing the petition; how the

debtor’s actions affected creditors; the debtor’s treatment of creditors both before

and after the petition was filed; and whether the debtor has been forthcoming

with the bankruptcy court and the creditors.’ ” In re Myers, 491 F.3d 120, 125

(3d Cir. 2007) (quoting In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996)).®

As some of these factors are intertwined, the Court will examine related

factors together.

Timing of Petition & Motive for Filing Petition

IBS filed its state court lawsuit against the Debtor on July 28, 2017, and

the Debtor commenced his bankruptcy case roughly two months later on

October 3, 2017. See Joint Stipulation 9 3. In his Rule 2004 examination

testimony, the Debtor stated that his bankruptcy filing was due to the IBS

lawsuit. See Remote 2004 Examination of Kevin Moser (the “Rule 2004 Exam Tr.”)

75, attached as Exhibit B to the Joint Stipulation. IBS argues that this

6 In In re Myers, the Third Circuit observed in light of Mrs. Myers request to convert to

chapter 7, that “Chapter 7 cases are subject to the same requirement of good faith as

Chapter 13 cases.” 491 F.3d at 127 (citing In re Tamecki, 229 F.3d at 207). In Myers,

the bankruptcy court “concluded that the same factors that indicated that Mrs. Myers

filed her Chapter 13 cases in bad faith would apply with equal force to her Chapter 7

filing.” In re Myers, 491 F.3d at 127.

11

admission, along with the timing of the petition and general ability to pay bills

at the time of filing, is evidence of bad faith.

While the suspicious timing of a bankruptcy petition is a factor for the

court’s consideration of bad faith, the Third Circuit has observed that the

commencement of a bankruptcy case “during the pendency of related state court

litigation is not necessarily in bad faith.” In re Myers, 491 F.3d at 125. In such

circumstances, bankruptcy courts may find bad faith “where the purpose of the

bankruptcy filing is to defeat state court litigation without a reorganization [or

bankruptcy] purpose.” In re Myers, 491 F.3d at 125 (quoting In re Dami, 172

B.R. 6, 10 (Bankr. E.D. Pa. 1994)).

The Court finds that the Debtor has shown a valid reorganization and/or

bankruptcy purpose behind his filing for bankruptcy relief.

It is true that the Debtor proffered sworn testimony indicating that at the

time of case filing he was not “very delinquent” on his bills and was not

experiencing significant issues paying his bills. See Rule 2004 Exam Tr. 75.

However, the pending IBS lawsuit represented a significant financial obstacle for

the Debtor. Even though the Debtor believed the lawsuit lacked merit, he testified

that he could not afford to defend himself as IBS had “deeper pockets.” See Rule

2004 Exam Tr. 74-77. This inability to defend himself pushed the Debtor into

bankruptcy.

The record further reflects that unlike other cases where a debtor files

solely to forestall foreclosure or execution without an intention to reorganize,’

the Debtor testified that his plan was to pay his creditors back over a five-year

period in chapter 13. See Rule 2004 Exam Tr. 58, 78-79. Consistent with his

testimony, the Debtor’s subsequent actions evidence his intent to do so.

On November 7, 2017, the Debtor timely filed a proposed chapter 13 plan,

which initially proposed to pay off one hundred percent of the then uncontested

unsecured claims totaling $16,052.23 (the debt to IBS was listed as contested).

The Debtor faced several obstacles in his reorganization efforts, including an

injury which impacted his ability to generate income and an unsuccessful effort

to object to IBS’s claim, which ultimately thwarted his chapter 13 efforts.

However, failure to successfully complete a chapter 13 does not automatically

mean that the debtor did not intend to reorganize at the outset.

See e.g. In re Mondelli, 558 F.App’x 260 (3d Cir. Mar. 7, 2014)(finding the debtor’s case

was filed in bad faith where the debtor had previously sought and was denied multiple

stays of the sheriff's sale against commercial property, the co-owner’s bankruptcy case

was filed and dismissed as being in bad faith just prior to the debtor’s own filing, and

the debtor’s purported plan was illusory); In re Knauss, Nos. CA 13-01131-WY, BKY 12-

17482-SR, 2013 WL 5942391 (E.D. Pa. Nov. 5, 2013)(serial bankruptcy filer’s latest

chapter 13 petition was filed in bad faith when property subject of sheriff's sale was

transferred without meaningful consideration on eve of sheriffs sale and the debtor

commenced bankruptcy case the morning of the scheduled sale); In re Joobeen, 385

B.R. 599, 611 (E.D. Pa. 2008) (serial filer’s history of commencing bankruptcy cases

when creditors took adverse action against him in state court and ceasing prosecution

of his bankruptcies when state court threat was no longer imminent, in addition to other

issues of candor, supported finding of bad faith);and Ruth v. Swigert (In re Swigert), 601

B.R. 913 (Bankr. M.D. Pa. 2019) (debtors’ second chapter 13 filing, commenced during

the pendency of their first chapter 13 case after entry of an order in that first case

granting relief from stay as to certain collateral, was commenced in bad faith as debtors

sought to circumvent 11 U.S.C. § 109(g)(2) by filing second case prior to voluntarily

dismissing their first case in order to obtain further stay of actions against the

collateral).

13

Notably, at the time of the Debtor’s conversion, the chapter 13 trustee

represented that the Debtor was current on his then pending chapter 13 plan

payments—albeit the plan was insufficient to meet the liquidation alternative

requirement. See January 8, 2020 Tr. 2.

At that point the trustee requested conversion, which the Debtor did not

object to despite being aware that conversion to chapter 7 would open his assets

up to liquidation for the benefit of his creditors, including IBS. See January 8,

2020 Tr. 2-4. And, that is exactly what happened.

In view of these circumstances, the Court finds that the Debtor

commenced the case with a valid bankruptcy purpose and not simply as a means

to deprive the state court of jurisdiction and forestall creditor collection activity.

Here, the Debtor, a non-serial filer, took significant reorganizational steps

including filing a plan, objecting to IBS’s claim, making plan payments, and

when ultimately unsuccessful, agreeing to convert to a liquidation scenario for

the benefit of his creditors. Thus, the bankruptcy was not just a means to shield

his income or assets.

Accordingly, the factors of timing of the petition and motive for filing weigh

in favor of denying the Motion to Dismiss.

Nature of the Debt & How the Debt Arose

The Court next looks at the nature of the debt and how it arose. It has

been said that these factors look “at whether the incurring of a debt resulted

from bad acts or intentions of the debtor.” Hamm v. Manfredi (In re Manfredi),

434 B.R. 356, 359 (Bankr. M.D. Pa. 2010).

As stated above, the IBS debt arises from the professional relationship

between the Debtor and IBS. The Debtor performed work as a construction

contractor for IBS on approximately twenty-five projects beginning in 2009. See

Joint Stipulation ¶¶ 1-2. However, the relationship soured, and IBS ultimately

brought suit against the Debtor and a co-defendant, alleging negligence, breach

of contract, and unjust enrichment claims. See Joint Stipulation ¶ 4. Specifically,

IBS alleged that the Debtor “negligently performed construction activities below

the acceptable standard of care, negligently damaged equipment, refused to

complete work, and performed actions and activities outside the scope of his

work or intended work in a negligent manner which damaged property other

than his own work.” See Joint Stipulation ¶ 5. Also, that the Debtor “left existing

construction Projects for IBS in a dangerous condition for third parties; agreed

to perform actions on behalf of [Innovative] outside the scope of any agreements

with [Innovative]; performed negligent construction in an accelerated and

haphazard manner without regard to safety standards or manufacturer’s

direction; and created damage to property on Projects that did not involve his

work.” See Joint Stipulation ¶ 6.

In review of the claims asserted, including a reading of the state court

complaint, the Court is not of the view that the underlying debt is the product of

“conduct akin to fraud, misconduct or gross negligence” that would qualify the

matter as the type of “egregious case” to which a finding of bad faith should be

confined. See In re Myers, 491 F.3d at 126 (that the underlying debt was incurred

for fraudulent conveyance was properly considered in finding bad faith). See also

In re Manfredi, 434 B.R. at 360 (even if allegation was true that debt was due, in

part, to gambling, it would not support a finding of bad faith).

In assessing the alleged egregiousness of the conduct underlying the debt,

the Court finds influential IBS’s own decision not to pursue a denial of discharge

or determination of non-dischargeability under 11 U.S.C. 88 727 and/or 523.

See e.g. 11 U.S.C. § 523(a)(6)(which excepts from discharge debts incurred for

“willful and malicious injury”) or § 523(a)(4)(which excepts debts for “fraud”). The

Third Circuit Court of Appeals wrote in In re Myers, that the nature of the debt

and manner in which it arose are not solely relevant to dischargeability actions,

but also to good faith determinations. See 491 F.3d at 126. The fact that IBS did

not seek relief under 11 U.S.C. 88 523 and/or 727 is telling. Especially

considering that the deadline to file certain of those actions (April 14, 2020), fell

two months after the filing of the amended schedules and was approximately two

and a half months after the January 28, 2020 deadline to object to conversion.

See Notice of Chapter 7 Bankruptcy Case, ECF No. 113, 4 9. Thus, well after IBS

either knew or should have known that its claim would not be fully paid out of

the sale of estate assets.®

This Court acknowledges that at the November 3, 2020 hearing on the Motion to

Dismiss, Counsel for IBS explained that no action was taken to challenge the entry of

the Debtor’s discharge as to all or some of his debts because the full extent of the

Debtor’s alleged bad faith conduct was not apparent until the Rule 2004 examination.

In particular, IBS’s Counsel pointed to the Debtor’s testimony that his bankruptcy filing

was motivated by the state court lawsuit by IBS. See November 3, 2020 Hr’g at 10:47-

10:52. However, as set forth above, the timing of the Debtor’s bankruptcy filing was

always known. Additionally, IBS argued in its Pre-Hearing Statement that: “Thl[e]

disparity between identified assets and identified liabilities indicates that the primary

purpose of the Debtor's bankruptcy filing was to avoid a judgment being entered against

him concerning the harms he previously caused to Innovative.” See ECF No. 107 at 4.

While Counsel for IBS argues that the Rule 2004 examination testimony is more

16

Accordingly, the nature of the Debt and how it arose does not weigh in

favor of dismissal. In fact, the record of this case is that the Debtor is bona fide

in pursuing a bankruptcy discharge of his debts.

Lack of Candor

The next factor is whether the debtor has been forthcoming with the

bankruptcy court and creditors. The Court finds that this factor weighs in favor

of denial of the Motion to Dismiss.

IBS avers that the Debtor has not been forthcoming with the Court and

cites to the Debtor’s delay in amending schedules to reduce the value of certain

assets. What is unique about IBS’s argument is that IBS does not allege that

the Debtor has “conceal[ed] or misrepresent[ed] income, inflated [his] expenses

to hide income” or otherwise concealed, misrepresented, or inexplicably

transferred assets to “place [them] beyond the reach of creditors,” which is found

in most instances of bad faith. See Perlin, 497 F.3d at 375; Marks, 174 B.R. at

40-41. Instead, IBS alleges that it was the Debtor’s initial overvaluation of his

disclosed assets and alleged failure to timely correct them that demonstrate a

lack of candor. In this respect, IBS does allege that the Debtor knowingly misled

IBS as to the value of his assets, but such overvaluations did not conceal or

otherwise place the assets beyond the reach of creditors.

concrete and lessens the need for IBS to rely on circumstantial evidence to prove the

Debtor’s motivation for filing, the fact of the matter is that IBS was aware of the

circumstances surrounding the Debtor’s filing in relation to the IBS lawsuit prior to the

April 14, 2020 deadline to commence certain actions under 11 U.S.C. 8§ 523 and 727.

Moreover, that IBS was already confident enough in its argument to raise it in a court

filing.

17

As to the effect of the overvaluations, IBS argues that the improper

overvaluation caused IBS to pursue a course of litigation that it might otherwise

not have pursued; specifically, in objecting to the Debtor’s chapter 13 plans due

to failure to satisfy the liquidation alternative analysis. Also, that despite being

aware of the issues in October 2019, the Debtor sought conversion and permitted

the objection period to run before formally amending his schedules. The Court

is not persuaded by IBS’s argument.

The Debtor’s sworn testimony is that the valuation issues or mistakes were

not discovered until October 2019, and such issues were disclosed on the record

at the November 13, 2019 hearing. See Rule 2004 Exam Tr. 84-89. During the

November 13, 2019 hearing, it was explained that the Debtor incorrectly valued

his assets using a replacement value as opposed to a fair-market value. In his

Rule 2004 examination, the Debtor testified to his confusion and lack of

understanding about how he was to value his assets. See Rule 2004 Exam Tr.

89. Thus, these circumstances suggest a lack of bad faith intent. See Andrews

v. Kerschner (In re Kerschner), 246 B.R. 495, 499 (Bankr. M.D. Pa.

2000)(mistakes in debtor’s schedules were immaterial to finding of bad faith

where there is no evidence that mistakes were more than mere oversight).

Based on the timing of discovery in October 2019, the valuation issues

were not known to the Debtor at the time IBS filed its plan objections in

December 2017 and October 2018. And, although immediate formal amendment

of schedules would have been preferable, both the Court and the creditors either

were, or should have been aware, of the valuation issues prior to conversion and

expiration of the objection period. Thus, it could not be said that the Debtor

overstated the value of the assets as a means to defraud the Court and creditors.?

Supporting a lack of intent to defraud, the Court observes that the Debtor’s

mistaken overvaluation of assets hampered his own efforts to reorganize under

chapter 13 by erroneously inflating the amounts necessary to satisfy the

liquidation alternative analysis. Thus, forcing the Debtor into a chapter 7 case

in which his non-exempt assets were liquidated for the benefit of creditors. Of

course, the liquidated assets consisted of construction equipment the Debtor

used to generate income. To find that the Debtor intended to defraud creditors

by his overvaluations would be to find that the Debtor proverbially “cut off his

nose to spite his face.” While there is animosity between the parties, the Court

is not convinced that this is the case.

In addition to the mistaken overvaluation of assets, IBS also points to

several instances where the Debtor missed deadlines or failed to comply with

court orders throughout his case. Debtors undoubtedly have a duty to comply

with the applicable statutes, rules, and court orders, and such compliance is

important to the proper functioning of the bankruptcy process. See 11 U.S.C. §

° At the November 3, 2020 hearing on the Motion to Dismiss, IBS alleged that the

Debtor’s less than perfect efforts to timely or promptly answer discovery related to the

Chapter 13 Trustee’s discovery requests in connection with the confirmation dispute—

in that, the Debtor failed to supply all requested documents—evidences an intent to

hide the information and materially inflate his assets. See November 3, 2020 Hr’g at

10:10-10:13. The Court is unconvinced. The discovery requests were served on the

Debtor on September 17, 2019. Although the Debtor failed to respond timely, the Court

reset the deadline to respond at the November 13, 2019 hearing. See November 13, 2019

Tr. 18. It was also at this hearing that IBS was put on notice that the asset valuations

were overinflated. Thus, the Debtor’s subsequent failure to provide all requested

documents cannot be taken as the Debtor attempting to hide the overvaluations, as the

Debtor had already brought the overvaluations to the Court’s (and IBS’s) attention.

19

521 (setting forth the duties of a debtor in bankruptcy). However, if the Court

were to demand perfect adherence nary a debtor would successfully complete a

bankruptcy case. In review of the record of this case, while the Debtor has indeed

been imperfect, and this Court has at times expressed its frustration, the Court

does not view the Debtor’s conduct as rising to the level of egregiousness which

would support dismissal.

Debtor’s Actions & Treatment of Creditors

The final factors to consider are how the Debtor’s actions affected

creditors. “Generally, [the ‘treatment of creditors’] factor looks at actions taken

by the debtor to frustrate creditors.” See In re Manfredi, 434 B.R. at 361.

At the outset, and as stated above, there is no allegation that the Debtor

concealed or otherwise transferred assets in an effort to put them beyond the

reach of his creditors. See In re Myers, 491 F.3d at 126 (debtor acted in bad faith

by allowing withdraw of $6,000 from account in violation of court order); In re

Kerschner, 246 B.R. at 498-499 (debtor’s continued spending of decedent

estate’s assets in violation of court order while contemplating bankruptcy was

consistent with bad faith).

Instead, relevant to these factors, IBS raises issue with: the Debtor’s

treatment of IBS due to Debtor’s perceived failure to submit a claim to his

insurance carrier on account of the IBS lawsuit before filing for bankruptcy, the

Debtor’s failure to follow through with its stated intent to attempt to negotiate a

settlement, and the Debtor’s alleged furtive conduct relative to asset inspection

and sale.

Starting with the latter two, this Court does not find that the Debtor’s

failure to follow through with negotiations rises to the type of egregious conduct

that warrants dismissal. As for the Debtor’s conduct during the asset inspection

and sale process, the Court notes that the Chapter 7 Trustee, who was tasked

with such efforts, stated that he does not believe that the Debtor’s actions relative

thereto warrant a dismissal of the bankruptcy case. See Br. Resp. IBS’s Motion

to Dismiss 5-6, ECF No. 197. The Court puts much stock into the opinion of the

Chapter 7 Trustee who witnessed first-hand the Debtor’s behavior and who was

directly impacted by the Debtor’s conduct.

As for the final point, that the Debtor could have submitted a claim to his

insurance carrier which would have potentially compensated IBS for its claim,

IBS’s position presumes that the Debtor’s insurance coverage would have

provided for the claim. However, this conclusion is something that the Debtor

disputes on the theory that his insurance policy would not cover breach of

contract claims, which is how the Debtor categorizes IBS’s state court claims.

See Debtor’s Br. Opp’n Mot. Dismiss of Innov. Bldg. Sols. 15-16, ECF No. 201.!°

Nonetheless, even if IBS would have been compensated through the policy,

it is not evident that the Debtor acted with any animus or ill-intent in exercising

his statutory right to seek bankruptcy protection or that his filing was to

10 The Debtor raises the issue of whether IBS’s state court claims would be viewed as

breach of contract claims under Pennsylvania’s gist of the action doctrine and, in turn,

whether the insurance policy would cover those claims. The Court makes no findings

with respect to these issues as they are not necessary to resolve the pending Motion to

Dismiss.

21

frustrate IBS. In fact, the record reflects that the Debtor testified that he did not

believe that the lawsuit had merit. Thus, in exercising his statutory right to file

for bankruptcy, it does not appear that the Debtor was motivated by an intent to

“shirk” responsibility, as the Debtor did not believe there was anything to “shirk”

responsibility for.

In addition, IBS never petitioned this Court for relief from stay to pursue

a claim against insurance. See In re Glunk, 342 B.R. 717, 740 (Bankr. E.D. Pa.

2006) (noting that “[u]nder § 362(d)(1), bankruptcy courts have routinely granted

relief to permit personal injury plaintiffs to prosecute their claims in state court

and to limit their collection efforts to the available insurance benefits”). Nor has

any evidence been presented demonstrating that the Debtor hid or otherwise

obstructed IBS from the discovery of an insurance policy.!! To be clear, at the

November, 3, 2020 hearing on the Motion to Dismiss, IBS alleged that insurance

documents were requested pursuant to its Rule 2004 subpoena duces tecum and

“ The fact that an insured does not tender a claim, does not necessarily vitiate coverage

of a covered loss or erase a duty to defend. For example, if an insurer is put on notice

of the claim by the injured party, the insurer would be hard pressed to ignore the

claim. Despite third-party direct action limitations against insurers, see 40 Pa. Stat.

Ann. § 117, the general rule is that:

If the insurer has actual knowledge of the claim or suit, it may need to

establish more than simply lack of notice in order to be relieved of any

duty to defend the insured. Under the majority rule, an insurer is not

relieved of its defense or indemnity obligations because its insured failed

to provide it with demands or court papers unless a showing of prejudice

can be established.

4 Philip L Bruner & Patrick J. O’Connor, Jr., Bruner & O'Connor on Construction Law

§ 11:132 (2020) (citations omitted); see Brakeman v. Potomac Ins. Co., 371 A.2d 193,

196 (lack of notice only is not sufficient for insurer to escape liability, prejudice is also

required).

22

that the Debtor failed to comply with such request. See November 3, 2020 Hr’g

at 11:10. However, this Court’s review of the Notice of the Taking of Rule 2004

Examination of Debtor Kevin Moser and Request for the Production of Documents

does not reveal a request for insurance documents. See Joint Stipulation, Ex. C.

To the extent any of the requests therein could be interpreted to require the

Debtor to provide insurance information, the record reflects that the Debtor did

disclose his insurance provider to IBS during his Rule 2004 exam testimony. See

Rule 2004 Exam Tr. 79-80.

Moreover, the Court notes that IBS either had or should have had the

Debtor’s insurance information even prior to the filing of his bankruptcy case.

This is because certain of the purchase orders between IBS and the Debtor

(which are attached to IBS’s state court complaint) required the Debtor to provide

IBS with insurance certificates.!2 This appears to have been done as the state

court complaint enumerates the Debtor’s alleged breaches of contract and at no

time did IBS allege that the Debtor failed to provide the required insurance

certificates. Additionally, the Debtor testified at his Rule 2004 exam that

maintaining insurance coverage was a contractual requirement and he would

have let IBS know of his insurance coverage. See Rule 2004 Exam Tr. 79-80.

Further, the Debtor testified that he believes that IBS contacted his insurance

JB's state court complaint is filed on the docket as Exhibit A to the Joint Stipulation.

The referenced purchase orders are attached to the complaint as exhibits “D” and “E.”

Both cited purchase orders contain the following language: “Subcontractor shall submit

an insurance certificate for the said project, with adequate liability, automobile and wc

limits as IBS may request.” See Ex. D at 2, Ex. E at 3.

23

carrier directly, although he himself never put in a claim. See Rule 2004 Exam

Tr. 80-82.

So, IBS surely knew or should have known of the insurance coverage, but

never took any steps in the bankruptcy case to compel the Debtor or the Chapter

7 trustee to tender a claim.'%

Accordingly, the Court finds that these last factors also weigh in favor of

denying dismissal.

Other Factors

In setting forth its decision, this Court is mindful that other courts within

the Third Circuit have considered different and/or additional factors when

evaluating a motion to dismiss for lack of good faith. For example, in In re Glunk,

the Honorable Eric L. Frank of the United States Bankruptcy Court for the

Eastern District of Pennsylvania opined that considerations when deciding a

motion to dismiss under 11 U.S.C. § 707(a) could be distilled into the following

five categories: (1) “the debtor's (extravagant) lifestyle and ability to pay|;]” (2) the

disproportionate impact that bankruptcy relief would have on one particular

creditor, or only a few creditors, as compared to other creditors|;]” (3) forum

shopping or efforts to manipulate the judicial process to thwart the orderly

determination of a creditor claim pending in another court|;]” (4) prepetition

13TBS’s Counsel stated at the November 3, 2020 hearing that he believed, but could not

state for certain, that a demand for the Debtor to submit a claim to his insurance was

made by prior counsel before the bankruptcy filing. See November 3, 2020 Hr’g at 10:59-

11:01. The Debtor testified that he did not recall IBS’s counsel ever recommending that

he (the Debtor) send the state court complaint to his insurance. See Rule 2004 Exam

Tr. 80-81.

24

fraudulent conduct to place assets beyond the reach of creditors or less than full

and candid disclosure in the bankruptcy process itself[;]” and (5) an end result,

if bankruptcy relief is permitted, that is perceived to be fundamentally unfair or

excessive[.]” 342 B.R. at 734.

For purposes of completeness, this Court also considers these factors. In

doing so, the Court finds that dismissal is not warranted.

As to categories 3 and 4, the Court has already discussed these

considerations above—albeit under different labels—and found that neither

weigh in favor of dismissal. Specifically, the Court’s discussion regarding the

timing and motive for filing the petition also establishes a lack of forum shopping

or an effort to manipulate the judicial process (category 3). The Court has also

examined the Debtor’s candor, finding it does not weigh in favor of dismissal,

and noted that there is no allegation that the Debtor concealed or misrepresented

assets to place them beyond the reach of creditors (category 4). Notably, although

Judge Frank found that bad faith could be found on the basis of any one of the

categories, he also suggested that “certain factors may carry substantially more

weight than others.” In re Glunk, 342 B.R. at 735. Noting, “[i]t should be the

rare case that merits dismissal for lack of good faith in the absence of some

evidence indicative of categories 3 and 4, both of which involve some degree of

misconduct by the debtor.” Id. As stated, neither categories 3 nor 4 weigh in

favor of a finding of bad faith sub judice.

As for the remaining categories (1, 2, and 5), the Court also finds that these

do not support dismissal of the Debtor’s case. There is no allegation that the

Debtor is living a lavish lifestyle or has an ability to repay the debt. In fact, it was

the Debtor’s inability to confirm a repayment plan which spurred the Debtor’s

conversion to chapter 7.

With respect to whether the Debtor’s bankruptcy case will have a

disproportionate impact on IBS, the Court observes that the Debtor has other

creditors, both secured and unsecured. See Schedules D and E/F, ECF NO. 13,

12-17. However, even if IBS (as the Debtor’s largest creditor) were to be

considered the Debtor’s primary creditor, that alone is insufficient to merit a bad

faith finding. As Judge Frank wrote,

Frequently, the need for bankruptcy relief is caused by one

particular event that upsets the equilibrium in a debtor's pre-

bankruptcy economic life. For example, a catastrophic illness can

result in one staggering hospital bill. Or, one ruinous business

transaction can cause a previously successful small business to fail,

leaving the debtor-principal with liability on a very large guaranteed

debt. In both circumstances, the debtor may have little prospect of

generating sufficient income to repay the one, major debt. These

kinds of debtors invoke their rights under the Bankruptcy Code as

a means to obtain relief from burdensome debt and obtain a fresh

start—which are conventional, traditional and acceptable purposes.

These examples illustrate that simply because a debtor has

only one primary creditor, that fact by itself cannot ordinarily

establish that the debtor's desire to obtain a discharge is an abuse

of the purpose, spirit or provisions of the Bankruptcy Code and

therefore, may shed little light on the question whether a debtor's

filing is good faith. For a debtor's “debt structure” to take on bad

faith significance when there is only one primary creditor, ordinarily

there must be some other factor at play, such as prepetition

machinations to avoid payment, transfer of assets beyond the reach

of the main creditor or some undue interference with an orderly

judicial process for resolution of the primary debt

In re Glunk, 342 B.R. at 736.

No such “prepetition machinations,” transfers, or acts of interference are

present in the instant case before the Court.

Finally, as to the fundamental fairness of the Debtor obtaining bankruptcy

relief, the Court noted above that in pursuing this Motion to Dismiss IBS is

attempting to impose upon the Debtor all the detriments of a bankruptcy filing,

while denying him the benefit of a discharge. The record reflects that the Debtor

has subjected his unexempt assets to sale and they have been liquidated for the

benefit of his creditors. With the other factors weighing against a finding of bad

faith, it would be fundamentally unfair to deny the Debtor his discharge under

the circumstances.

Accordingly, the Glunk categories weigh against dismissal.

IV.

Based on the foregoing, the Court finds that IBS’s Motion to Dismiss is

untimely. However, to the extent that it could be viewed as timely, the Court

nonetheless denies the Motion to Dismiss on the merits. Although the Debtor’s

case has not been without its hiccups, the totality of the circumstances shows

that the Debtor has acted in good faith in both commencing his chapter 13 case

and through the subsequent conversion to chapter 7.

Accordingly, this Court shall enter an order denying the Motion to Dismiss.

Dated: May 11, 2021 A jlh

Hon. Jeffery A. Deller

FILED United States Bankruptcy Judge

5/11/21 12:02 pm

CLERK

U.S. BANKRUPTCY 27

COURT - WDPA

Case Administrator to Mail to:

Debtor

Paul W. McElrath, Jr., Esq.

John J. Berry, Esq.

Eric E. Bononi, Chapter 7 Trustee